Lessinger v. Commissioner

United States Tax Court · 1985 · Corporations

CorporationsSection 351Section 357(c)Innocent spousetaxcorporate formationincorporationsole proprietorship

Facts

Sol Lessinger operated a metal fastener business as a sole proprietorship and also wholly owned a pre-existing corporation, Universal, engaged in a similar business. Effective January 1, 1977, he transferred the proprietorship's operating assets and related business liabilities to Universal so the business could continue corporate financing, but Universal issued no additional stock or securities to him. Universal expressly assumed certain notes, paid the trade accounts payable in the months after the transfer, and its books reflected a debit to Sol's account for the excess of liabilities over asset basis. Sol and Edith filed a joint return, and Edith lived apart from Sol, did no work for Universal despite receiving payroll checks, and showed no knowledge of the return details beyond signing it.

Issue

Does section 351 apply to a transfer of assets and liabilities to a pre-existing wholly owned corporation when the transferor receives no additional stock or securities, thereby permitting gain recognition under section 357(c) if liabilities exceed basis? If so, were the liabilities assumed by the corporation, and is Edith Lessinger entitled to innocent spouse relief under section 6013(e)?

Rule

Section 351 applies where property is transferred to a wholly owned corporation and the transferor's proprietary interest remains unchanged, even if no additional stock is actually issued, because issuance in that setting would be a meaningless gesture. If, in such a section 351 exchange, the liabilities assumed or taken subject to exceed the adjusted basis of the transferred property, section 357(c) requires recognition of gain to the extent of the excess. For innocent spouse relief under section 6013(e), the spouse claiming relief must prove all statutory requirements, including that it would be inequitable to hold that spouse liable.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Nina Patel has operated a catering business in Columbus, Ohio, as a sole proprietorship for years. She already owns all the stock of Buckeye Banquet Services, Inc., a pre-existing corporation, and transfers the business assets to the corporation so operations can continue there, but the corporation issues no additional shares.

Which is the strongest argument that the transfer can still qualify under section 351?

Explanation. The majority held that section 351's exchange requirement is satisfied when property is transferred to a wholly owned corporation and the transferor's ownership interest remains the same, because issuing additional stock in that setting would be a meaningless gesture. The fact that the corporation is pre-existing does not defeat section 351. (Derived from Lessinger v. Commissioner (n.d.).)